The consequences of more efficiency
Updated: Jan 11, 2019
July 31 1961 IBM famously introduced the IBM Selectric typewriter. Instead of the "basket" of individual typebars that swung up to strike the ribbon and page, the Selectric had a "typing element" (frequently called a "typeball") that rotated and pivoted to the correct position before striking. The Selectric had a "Stroke Storage", which smoothed out the irregular key strokes of a typist. The capacity to type faster and more accurate was created. The Selectric allotted a speed of up to 14.8 characters per second. Producing text documents instantly became more efficient. The same amount of text could be produced in a considerably smaller amount of time.
Office workers have always used technology to become more efficient
Two decades down the line the introduction of desktop computers and Wordperfect, revolutionized text processing once again. Again there was a substantial boost in efficiency. The purpose of this brief history lesson is to demonstrate that the adoption of technology that helps office workers to be more efficient is of all times. What is also important to realize is that the efficiency gain is in production, not in the content. The developments in text processing have lead to increasing the speed at which the document is produced. It has not lead to better quality content. Please keep in mind that it is ultimately the content of the word document that counts, not the speed at which it is produced.
Demand for legal services in the US is flat...
Last week I was asked by a journalist form Lexis Nexis Law360 to comment on the slight decline in jobs for the legal industry that had been reported in the latest report of the US Department of Labor. The number of legal sector jobs landed at 1,136,700 at the end of December, according to the DOL’s Bureau of Labor Statistics. That’s 400 jobs fewer in the industry than at the end of 2017 and a decline of nearly 2,000 since October. One of the journalist’s questions was to explain how the number of jobs could decrease while the sector as a whole reported one of its best years in recent history. My answer was that the decline in jobs was most likely the result of increased efficiency. At present, efficiency per lawyer is growing faster than the market for legal services as a whole, so as a result fewer lawyers are needed to meet the demand. This trend will continue over the next years.
As previously noted, the U.S. legal market overall showed positive trends during 2018, with a healthy growth in worked rates. During 2018, standard rates increased by 3.1 percent, worked rates by 3.2 percent, billed rates by 3.3 percent, and collected rates by 3.4 percent. Reflecting these positive trends, average revenue growth across the market was up for the year. When we start digging below the surface however, the data shows that demand for legal services in the US in nearly flat (+1.3%). At the same time the average number of billable hours per lawyer per month has gradually dropped from 134 in 2007 to 122 in 2018 (-8.9%). It turns out that the shiny picture of the US legal industry is predominantly the result of higher rates. Obviously this is not a sustainable model.
Efficiency per lawyer at present is outpacing demand
Today’s legal industry has many tools at its disposal that will make lawyers more efficient. In other words, tools that make it possible to produce the same result in less time. Like with the introduction of the IBM Selectric over half a century ago, these tools just reduce the time needed to produce the same result. They do as such not influence the quality of the content. Using online legal databases and search tools, the use of e-discovery and e-due-diligence tools, all enable the lawyer to produce the same result in a shorter time frame.
As the examples in this article show, there is basically nothing new in applying technology to enhance efficiency. Over the past decades the market for legal services has grown considerably, so the increase in efficiency was met by an even greater increase in demand. This is no longer the case. Today demand is flat. Further increasing production efficiency will undoubtedly lead to fewer lawyers needed to complete the same tasks. The current leveraged business model will increasingly come under pressure.
The time-based business model will become unsustainable in the future
Law firms will need to re-engineer their business model. This will include the leverage and the time-based billing. Time-based billing is not compatible with increasing efficiency in a non-growing market. As I have written before, there is in my opinion too much emphasis on the disruptive forces of legal technology. Technology as such is nothing new and has been adopted through the centuries. The use of new technology has always made companies more profitable as it enabled them to create more output against less effort. Just look at the number of people that used to be employed by banks, insurers and corporate head offices in general a few decades ago.
Business model re-engineering will be necessary
Today fewer employees deliver more output and more profit. The problem with the legal industry is that it has built a business model that heavily relies on the sheer number of people employed, as more lawyers making billable hours means more revenue and more profit. We need to re-engineer the legal industry with the product and the clients’ needs in mind.
We at TGO Consulting have over the past few years developed and implemented alternative law firm business models that result in increased long term profitability, while embracing increased efficiency and creating greater client loyalty and satisfaction.
I will write about this in more detail in future articles. Stay tuned!